|Question||b. If the central bank wants to use monetary policy to reverse a 10% shock to AD, it will have to raise money growth by 10%. Now draw two more AD curves on the figure above: â??Fed reacts to false shockâ? (FR-F to keep it short) and â??Fed reacts to true shockâ? (FR-T).
c. After the central bank overreacts to the exaggerated news reports of economic calamity, what is the final result: Will real growth be higher or lower than before the shock hit? Will inflation be higher or lower than before the shock hits?